Indian Oil's chairman Sanjiv Singh said that Iran has not ruled out participating in the expansion at Chennai Petroleum Corp Ltd, a south India-based 20,000 barrels per day (bpd) refinery.
Iran's participation has been questioned after India cut back its Iranian crude oil imports following US sanctions.
However, Singh's comments come a few days after India exempted rupee payments to the National Iranian Oil Co (NIOC) for crude oil imports from a withholding tax.
The exemption will allow Indian refiners to settle about $1.5 billion of outstanding payments to NIOC through direct rupee payments.
It has been expected that these payments could help Iran invest in Indian projects, particularly the Chennai Petroleum Corp expansion.
"Iran has always been positive with this (the new rules). I think they should be able to invest," Singh told Reuters, following a media conference on Wednesday.
Chennai Petroleum plans to invest up to Rs 356.98 billion ($5.1 billion) to replace the 20,000 bpd Nagapattinam refinery in Southern Tamil Nadu state with a 180,000 bpd plant.
Naftiran Intertrade, the Swiss subsidiary of National Iranian Oil Company, holds a 15.4 per cent stake in Chennai Petroleum, while Indian Oil has about a 52 per cent share.
Singh said a detailed feasibility report for the expansion has yet to be prepared.